Austria: New Approval Regime On Acquisitions Of Austrian Companies In Certain Industry Sectors By Non-EU/EEA and Non-Swiss Persons

An amendment of the Austrian Foreign Trade Act (FTA), in force
since 08/12/2011 subjects the acquisitions of relevant interests in
enterprises in specific industries, including telecoms and energy,
to review and approval by the Austrian Ministry of Economic
Affairs

Summary: Under the 17/11/2011 amendment to the
Foreign Trade Act (FTA) which became effective as of 08/12/2011,
acquisitions of 25 percent or more or a controlling interest (the
"Relevant Interest") by non-EU, non-EEA
and non Swiss persons in an Austrian enterprise engaged in a
particular – protected - industry sector defined under
the Act will be subject to advance approval by the Austrian
Ministry of Economic Affairs. The list of protected sectors is
extensive and includes inter alia not only the defense equipment
industry but telecoms, energy, water supply, hospitals, railway and
road traffic as well as universities (the "Protected
Sector"). The application for approval by the
Ministry will have to be submitted before entering into a legally
binding agreement to acquire the Relevant Interest or before
announcing the launch of a public offer in an enterprise of the
Protected Sector. Additionally, the FTA provides for an ex officio
review procedure. The waiting time for the approval is between 1 to
max 3 months from the notification. Any prohibition will have to be
reasoned and is subject to appeal. The sanctions for violation of
the approval requirement include the invalidity of the acquisition
agreement. Additionally, even negligent violations of the approval
requirements are subject to fines amounting to up to 360 days
income or up to 1 year imprisonment; intentional violation is
subject to up to 3 years imprisonment. The approval procedure and
sanctions are broader in scope than the foreign investment
procedure of other EU regimes, in particular the ex post review
regime in Germany. Unfortunately, the FTA includes many ambiguities
including as to scope of applicability. Practice by the Ministry of
Economic Affairs over the next 12 months will tell how
uncertainties and ambiguities under the FTA will be resolved.

Which transactions qualify for advance approval under the
FTA?

Transactions resulting in the acquisition of an enterprise, of a
participation of 25% or of a (co-)controlling interest in an
enterprise with seat in Austria, engaged in a Protected Sector as
listed under sec 25a FTA by a foreign investor who is either a
non-EU or non-EEA or non-Swiss citizen or has its seat in a third
country, if such country is not a member of the EEA or Switzerland
(the "Foreign Investor"), fall under the
scope of the ex-ante approval requirements.

Which industry sectors qualify as "Protected
Sectors"?

The FTA defines and lists the following industry sectors as
Protected Sectors:

(a) The sectors relating to the internal and external security
of Austria, in particular of the defense equipment industry and
security services.

(b) The sectors relating to public order and safety and to
procurement and crisis services. These sectors include (i)
hospitals, ambulance and emergency physician services, (ii) fire
fighters and civil protection service, (iii) energy and gas supply,
(iv) water supply, (v) telecoms, (vi) railway, water and road
traffic, and (vii) universities, schools of various types and
pre-schooling institutions.

Who qualifies as "Foreign Investor"?

No approval is required if the foreign investor is an EU / EEA
or Swiss citizen or has its seat in the EU / the EEA (i.e. Iceland,
Liechtenstein and Norway) or Switzerland.

Thus, third country investors subject to the approval regime are
non-EU, non-EEA and non-Swiss.

Political commentators suggested that the approval regime was
introduced specifically to protect the partially state-owned oil
group OMV, currently co-controlled by the Austrian state holding
ÖIAG and IPIC, Abu Dhabi, and Telekom Austria, currently
controlled by ÖIAG, against unwanted takeovers by non-EU
acquirers. Clearly, all overseas investors, including from the US,
Australia, Asia, Central Europe (if not EU) and CIS and Middle
Eastern countries need to review whether a particular intended
investment into a specific Austrian target requires advance
approval by the Austrian Minister of Economic Affairs.

Compliant avoidance of Approval Requirement?

Pursuant to the legislative materials, indirect investments by
Foreign Investors via EU or EEA acquisition vehicles are not
captured by the approval regime, since EU law would not allow such
investment restrictions. Accordingly, in case a Foreign Investor
invested via an EU domiciled acquisition vehicle, in particular
with a multilayered ownership structure or under a technical
non-control structure involving non-controlled private foundations,
no approval requirement should apply. However, Austrian Ministry
practice could still – initially – establish
and apply a substantive review in application procedures, resulting
in a beneficial ownership test. Moreover, any structure could be
tested under the ex-officio review procedure as to –
illegal – circumvention of the approval requirement.

Given that (i) participations of parties acting in concert are
to be added together, and (ii) approval is required prior to
entering into a legally binding agreement and in case of a public
offer prior to the announcement of such public offer, and (iii)
sanctions in case of a violation of the approval requirement
include invalidity of the acquisition agreement, monetary fines and
even imprisonment of up to 1 year (negligent violation) and up to 3
years (intentional violation), (iv) the Minister for Economic
Affairs also has ex post ex officio investigation rights (without
statutory time limit) and (v) there are ambiguities as to the scope
of application and possible exemptions under the FTA, the new
approval requirement will likely caution Foreign Investors to
invest at or above 25% without approval by the Austrian Minister of
Economic Affairs.

Which procedures apply, what are the timelines to obtain
approval?

The FTA distinguishes two types of procedures, (i) the ex ante
approval procedure, and (ii) the ex officio review procedure. The
ex ante approval procedure is 1 month (phase I) and, in case of in
depth review, additional 2 months (phase II). The ex officio
procedure has no trigger date within which such ex officio review
must be initiated.

The application in the ex ante approval procedure must be
submitted before (i) entering into a binding commitment to acquire
the relevant interest in the target engaged in a Protected Sector,
(ii) announcing the launch of a public offer in such target. During
phase I of the approval procedure, the Minister of Economic Affairs
must either approve the acquisition within 1 month from the filing
of the application or issue a decree initiating a phase II; if no
decree is issued, the acquisition is deemed approved. The phase II
procedure is up to 2 months. During phase II the Minister may
prohibit the acquisition. Alternatively the Minister may issue an
unconditional approval decree or approve the transaction subject to
the fulfillment of certain conditions to mitigate the risks
associated with the acquisition. If the Minister prohibits the
transaction, the prohibition order can be appealed. Unfortunately,
the FTA does not provide for a fast track non-binding assessment or
negative statement procedure as to a contemplated transaction. To
obtain legal certainty, Foreign Investor would need to formally
initiate the approval procedure.

The ex officio review procedure under sec 25a/11 FTA applies in
limited cases (i.e. the sectors relating to internal and external
security of Austria), however the requirements and trigger events
are not entirely clear. From the statutory wording the ex officio
review is aimed at suspicious circumvention structures and requires
a reasonable suspicion as to a reasonable threat to certain
protected interests. Unfortunately, the FTA does not provide for a
time limit within which the ex officio procedure must be initiated.
An ex post prohibition order following from a late ex officio
review may be practically impossible to implement.

What are the legal consequences and sanctions of a violation of
the approval requirements?

The FTA requires the Foreign Investor to file for approval prior
to entering into a legally binding agreement regarding such
acquisition. Any acquisition entered into without required approval
is invalid and, if implemented, can be unwound. Additionally, even
negligent violations of the approval requirements are subject to
fines amounting to up to 360 days income or up to 1 year
imprisonment of the managers of the acquirer; intentional violation
is subject to up to 3 years imprisonment.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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The legal investigation of a target company in M&A transactions, i.e. a "legal due diligence", has traditionally been performed on behalf of the potential purchaser

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